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Ratings Facilities/Instruments Long term Bank Facilities-Rupee loans Long term Bank Facilities-Bank Guarantee Long term loan- External Commercial Borrowing* Total Facilities * In the form of JPY 10.46 billion Rating Rationale The rating continues to positively factor the experience and resourcefulness of the promoter group having an established track record in both, implementation of large infrastructure projects and execution of large Engineering-Procurement-Construction (EPC) contracts. The rating also derives strength from the achievement of all major approvals/clearances, acquisition of majority of the land requirement, supercritical technology of the plant, letter of assurance for coal linkage for majority of the fuel requirement, firm off-take arrangement by way of Power Purchase Agreement (PPA) and satisfactory progress of the project as per plan. The rating is however, constrained due to the high capital cost of the project as compared to other similar projects, foreign currency risk, interest rate risk and the risks generally associated with the implementation of infrastructure projects of large scale and complexity. The ability of the company to complete the project in a timely manner without any significant cost and time overruns and operating the plant in a profitable manner, receipt of coal linkage for the remaining quantity and execution of a firm fuel supply agreement remain the key rating sensitivities. Background Nabha Power Limited (NPL), a 100% subsidiary of L&T Power Development Limited (L&TPDL), is setting up a coal based super-critical thermal power plant with a capacity of 1,400 MW (2x700 MW) in Patiala district, Punjab. L&TPDL, formed in 2007, as a wholly-owned subsidiary of Larsen and Toubro Limited (L&T), undertakes power development projects for the group. The total project cost of Rs.9,600 crore is being funded at a debt-equity ratio of 3:1. The financial closure for the project has been achieved. The expected commercial operations date (COD) is October 2013 (Phase I) and February 2014 (Phase II). As on June 30, 2012, NPL has achieved 57.90% of the total physical progress of the project and has incurred expenditure of Rs.3,576 crore. Credit Risk Assessment Long experience and resourcefulness of the established promoter group and established track record of the EPC contractors NPL is a step-down subsidiary of L&T, a diversified conglomerate engaged in the businesses related to the technology, engineering, construction and manufacturing. L&T has more than four decades of experience in the EPC of power projects and has participated in the power plants with aggregate capacity of over 4,000 MW. NPL has awarded EPC contracts for BoilerTurbine-Generator (BTG) and Balance of Plant (BOP) to L&T, which will source the BTG from L&T MHI Joint Ventures. Joint ventures (JVs) were formed between L&T and Mitsubishi Heavy Industries (MHI) in 2007 to manufacture the turbine-generators and boilers and have set up manufacturing units at Hazira, Gujarat. MHI, a USD 35 billion company, has diversified business interests and is a leading boiler and turbine manufacturer and has installed supercritical steam turbine generators of 17,000 MW and has also installed supercritical boilers of more than 19,000 MW worldwide. The super-critical technology of MHI has highly proven operational reliability and adequate Operation & Maintenance (O&M) arrangements would be made to ensure high plant availability.

Amount (Rs. crore) 6,676 150 524 7,350

Ratings 1 CARE A [Single A] CARE A [Single A] CARE A [Single A]

Remarks Reaffirmed Reaffirmed Reaffirmed

Complete definition of the ratings assigned are available at and in other CARE publications

For FY12 (refers to the period April 1 to March 31), L&T, on consolidated basis, earned PAT of Rs.4,691 crore on net sales of Rs.64,313 crore. Furthermore, on consolidated basis, it had networth of over Rs.29,000 crore as on March 31, 2012. Supercritical technology of the plant The supercritical technology on which the plant is based operates at higher efficiency as compared to a subcritical plant and leads to comparative fuel savings and lower CO 2 emissions. This shall support NPL in reducing the fuel costs and earn carbon credits going forward. High capital cost and high debt equity ratio NPLs project site is on agricultural land and the project thus involves a higher land cost vis-a-vis other projects of similar size employing supercritical technology. This combined with higher equipment cost due to sourcing of equipment from the reputed suppliers, higher Boiler-Turbine-Generator cost and the cost of the proposed railway infrastructure for transport of coal from the nearest railway station to the project site has led to a higher capital cost. Moreover, the project is debt funded with a high debt equity ratio of 3:1. PPA NPL has signed a long-term (25 years) PPA with Punjab State Power Corporation Ltd (PSPCL), a successor entity of the erstwhile Punjab State Electricity Board, for off-take of the entire power generated from the power plant. As per the PPA, the tariff consists of two parts capacity charge and energy charge. The capacity charges shall be paid, provided NPL maintains a minimum Availability Factor (AF) of 85% irrespective of whether the power is actually dispatched to PSPCL or not. The energy charge consists of fuel charges which are fully pass-through to PSPCL. The receivables would be backed by Letters of Credit (LC) and as such, payment security mechanism forms part of the PPA. As per the PPA with PSPCL, the responsibility of construction of the transmission line and onward evacuation of power from the plant switchyard lies with PSPCL. PSPCL is planning to construct 400-kilo volts direct current (KV D/C) lines from the project to Nakodar and Rajpura substations. Financial position of PSPCL The financial position of PSPCL is weak on account of accumulated losses, weak debt servicing indicators, increased debt levels and higher dependence on the short-term power purchase by the erstwhile PSEB. Any delays by PSPCL in the payments to NPL, especially in the light of the PPA being for the entire capacity, could adversely affect the cash flow position of NPL. Nevertheless, the PPA has a two tier payment security mechanism in place. Under this mechanism, PSPCL shall open an unconditional, revolving and irrevocable LC which shall be linked to the estimated average monthly billing. Further an escrow account shall also be opened through which revenues of PSPCL shall be routed and NPL shall have a first charge on the said revenues to the extent of the value of the LC. This two tier payment security mechanism mitigates the cash flow risk to NPL to a great extent. Moreover, in case of failure of PSPCL to make payments by the respective due date, NPL would have an option to sell up to 25% of the contracted capacity to a third party (which shall subsequently increase to 100% in case of continuing default beyond a period of 30 days). Fuel supply NPLs fuel requirement has been estimated at 5.7 million tonne per annum (MTPA) and it has been given a Letter of Assurance (LOA) for the long-term coal linkage from the Ministry of Coal (MoC) from South Eastern Coalfields (SECL; a fully owned subsidiary of Coal India Ltd) mines in Chhattisgarh for 5.55 MTPA of grade F coal which is around 97% of its coal requirement. The company is in the process of getting coal linkage for the balance requirement. However, a firm fuel supply agreement has not yet been executed by the company. As such, NPL may have to procure coal in the future at the then prevailing market rates. Nevertheless, as per the PPA, any increase in the fuel cost is completely pass through and NPL shall be compensated by way of hike in tariff thereby insulating NPL from any adverse effect of increase in its coal cost. Land and other utilities The initial land requirement for the project had been estimated to be 1,285 acres out of which 1,078 acres was required to accommodate the main plant and balance 207 acres for other off-site facilities such as railway link, water intake etc. However, the land requirement for other off-site facilities has been revised from 207 acres to 112 acres. NPL has acquired approximately 97% of its revised requisite land. Water requirement, estimated at 4,997 cubic meters per hour, would be met from Rajpura Distributory of Bhakra-Nangal Canal for which the company has received approval from Canal Irrigation Works, Punjab. The project has obtained all major clearances including environmental clearance.

Interest rate risk Interest rate on the term loan of NPL is subject to reset every year both during construction as well as post commissioning of the project exposing the company to interest rate risk. Foreign exchange fluctuation risk During FY12, NPL has replaced its undisbursed rupee term loan (RTL) of Rs. 524 crore with external commercial borrowing (ECB) of the same amount making it vulnerable to volatility in foreign exchange rates. Nevertheless, the company plans to hedge part of its foreign currency exposure thus mitigating the currency risk to a certain extent. Prospects In view of the favourable demand supply situation for power in the country, the growth prospects for power sector companies is favourable. NPLs plant is being set up in the Northern part of the country, facing a severe power shortage, and it has signed a long-term PPA with PSPCL for off-take of the entire power generated from the power plant. As such NPL is not expected to face a revenue risk. However, any significant delays by PSPCL in making payments to NPL towards the power purchased may have an impact on NPLs cash flow position.
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